You have probably heard about family limited liability companies (“LLCs”), but you may not know the reasons for which you would use them. A family LLC is an estate planning tool to transfer and/or hold assets for succeeding generations. Before we can discuss how they are used, we will first discuss what an LLC is.

An LLC is a business entity created by statute. It is not a corporation but, like a corporation, an LLC shields it owners from business liabilities. The owners of an LLC are called members. Instead of by-laws governing the operation of the company, an LLC has an operating agreement entered into between the LLC and its members.

An LLC can be member managed or manager-managed. With a member managed LLC, any member has the authority to act on behalf of the LLC. However, with a manager-managed LLC, only the appointed manager(s) can act on behalf of and bind the LLC. Most family LLCs are manager managed.

You can elect how the LLC income is to be taxed. The LLC can be taxed as a regular corporation and file its own tax return; as a partnership or an S Corporation where the income flows to the members’ individual tax returns; or, so long as you are the sole member, the LLC can be disregarded for tax purposes and you report LLC income on your own tax return as if the LLC did not exist.

The main reason, among others, that my clients have used family LLCs, is to keep family assets intact and under control by a limited number of persons. You are in control as LLC manager while you are alive and well, and the people who you choose will be the successor managers when you are unable and after your death.

The most common asset that I have seen placed in a family LLC is rental real estate. You continue to manage it during your lifetime while you can. After you are gone, instead of a percentage of the real estate going to each of the kids, a percentage of the LLC is distributed to each of them.

This way, you do not have a committee arguing or bickering over how to run the investment or how to sell it. The successor managers with knowledge and experience handle all the business affairs of the LLC and distribute the income to the kids. The kids have no say in the day-to-day LLC operations, unless of course you gave them the authority. The family assets stay together serving the family.

With a family LLC, you do not have to wait until after you are bereft of life to transfer an interest to your loved ones. You can gift an interest in the LLC during your lifetime without relinquishing control. You can buy, sell or lease LLC assets without having the other members sign off. No member has any say in the running of the LLC, only you, the manager.

This is much different than from gifting an interest in real estate. With an interest in real estate, all owners (and wives of married male owners) have a say and must sign off on selling it. And any one owner could force the sale of the real estate.

If you have a taxable estate, which is more than $5.34 million in 2014, there is an added bonus to gifting an interest in a family LLC. After you make a gift of an interest in the LLC, if the underlying assets increase in value, the entire appreciation attributable to the gifted interest from the date of the gift escapes estate tax upon your death. And when you make that gift, you might be able to discount that gift for gift tax purposes.

A family LLC might be an effective succession planning tool to keep you in control while you are alive and well; protect you and your loved ones in the event of your mental incapacity; and when you are gone, give what you have to whom you want, when you want, the way you want.

Matthew M. Wallace is an attorney and CPA with the Wallace Law Firm, PC in Port Huron and can be reached at 810-985-4320 or at matt@wallacepclaw.com.